Can green deposits be withdrawn prematurely? All your questions answered

A green deposit is a fixed-term deposit for investors looking to invest their surplus cash reserves in environmentally friendly projects. The investment in this fixed tenure deposit will go towards financing eligible businesses and projects that promote the transition to a low-carbon, climate-resilient, and sustainable economy.

Even though India's financial institutions such as banks and non-banking financial corporations (NBFCs) don't need to raise green deposits, if they do, they are supposed to follow the framework laid by the Reserve Bank of India (RBI). All regulated entities in India shall issue green deposits as cumulative/non-cumulative deposits. On maturity, the green deposits would be renewed or withdrawn at the option of the depositor. The green deposits shall be denominated in Indian Rupees only. 

 REs are required to allocate the proceeds raised through green deposits towards the following list of green activities/projects which encourage energy efficiency in resource utilisation, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation and value and improve natural ecosystems and biodiversity.

The central bank has identified nine sectors in which the proceeds from these green bonds must be used. They include renewable energy and green transport.

Exclusions

• Projects involving new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based.

• Nuclear power generation.

• Direct waste incineration.

• Alcohol, weapons, tobacco, gaming, or palm oil industries.

• Renewable energy projects generating energy from biomass using feedstock originating from protected areas.

• Landfill projects.

• Hydropower plants larger than 25 MW.

Green fixed deposits provide guaranteed returns and have a range of tenure options available, spanning from 18 months to 10 years. Premature withdrawal is allowed under certain conditions, and deposits up to Rs 5 lakh are insured.
 

Recently, the RBI released a document giving detailed replies to a set of queries investors may have with regard to green deposits.

 Is it permissible for REs to offer differential interest rates on green deposits?

No,  REs are not permitted to offer differential rates of interest on green deposits. The REs have to pay interest on green deposits to their customers as per agreed terms and conditions and aforesaid directions irrespective of allocation/ utilisation of proceeds.

Is there a restriction on premature withdrawal?
 

 There is no restriction on premature withdrawal of green deposits, however, the REs, shall adhere to the extant guidelines referred to here.Further, premature withdrawal would not have any bearing on the activities/ projects undertaken using the proceeds of green deposits.

Can green deposit proceeds be parked in liquid instruments?

As per the framework, unallocated proceeds of green deposits can be invested in liquid instruments with a maturity up to one year only. The liquid instruments are Level 1 High-Quality Liquid Assets as per the extant guidelines.

The REs can temporarily park proceeds of green deposits, pending allocation towards green activities/ projects, in liquid instruments with a maximum maturity of upto one year (This will have to be specified under the Financing Framework).

The framework does not envisage any penalty for non-allocation of proceeds towards green activities/ projects; however, it shall be subject to supervisory review.

Are the green deposits raised before the release of the framework covered under it? Whether the REs can finance green activities/ projects first and then later raise green deposits?

The framework is applicable for green deposits raised by REs on or after June 01, 2023.

REs cannot finance green activities/ projects first and raise green deposits thereafter.

Are investments made by REs in Sovereign Green Bonds covered under the framework?

As the activities/ projects listed in the framework are the same as indicated in Sovereign Green Bonds (SGrBs) framework, investment by REs in SGrBs are covered under the framework.

Can banks allow overdraft facility to customers against Green Deposits?

Banks are allowed to offer overdraft facility to customers against Green Deposits subject to the instructions contained in the Consolidated Circular on Opening of Current Accounts and CC/OD Accounts by Banks dated April 19, 2022, as amended from time to time.

Are the deposits raised under the above framework covered by Deposit Insurance and Credit Guarantee Corporation (DICGC)?

The deposits raised under the framework are covered by DICGC in accordance with the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and the regulations framed thereunder, as amended from time to time.

 Whether foreign banks can have a single global policy on green deposits?

Foreign banks can have a common global policy on green deposits, without prejudice to the provisions of the framework for green deposits raised in India after June 01, 2023.

 Can the green deposits be denominated in foreign currency?

No. The current framework permits green deposits to be denominated in Indian Rupees only.

Can depositors know about fund utilisation?  
 

The RBI has asked entities raising green deposits to put in place a board-approved ‘financing framework’ for effective allocation of green deposits. The document will cover eligible green activities/projects that could be financed, the process for project evaluation and selection, the allocation of proceeds and its reporting, third-party verification/assurance of the allocation of proceeds and the impact assessment.
 

Third-Party Verification/Assurance and Impact Assessment

The allocation of funds raised through green deposits by REs during a financial year shall be subject to an independent Third-Party Verification/Assurance which shall be done on an annual basis. The third-party assessment would not absolve the RE of its responsibility regarding the end-use of funds, for which the laid down procedures of internal checks and balances would have to be followed as in the case of other loans

"When looking for a bank or financial institution that offers green deposit options, it is important to choose a reputable institution with a strong track record of responsible banking practices and transparent reporting. Additionally, compare the interest rates and returns offered on green deposits with those of regular deposits, making sure that the financial returns are competitive and in line with your investment objectives...If you are putting your money in company green deposits, make sure you opt for AAA or higher-ranked company deposits," said Adhil Shetty, CEO of Bankbazaar.